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JD.com IPO Shows Allure Of Chinese E-Commerce, With Alibaba On Deck

Chinese e-commerce platform JD.com debuted on the Nasdaq with a splash Thursday, opening with a nearly 15% pop at $21.75 shortly after 11 a.m.

The company sold 93.7 million American depositary shares (ADS, which represent two of the company’s Class A shares each) at $19 apiece, above the expected $16-$18 range in a deal where demand wildly outstripped supply. Underwriters have an option to buy an additional 14.1 million ADSs at the offering price.

Thursday morning’s opening trade at $21.75 represented a 14.5% pop from the IPO price, and shares quickly climbed as high as $22.80 before retreating below their initial levels and settling in well above the offering price. With an hour left in the trading day the stock was up 10.5% at $21.00. (For more on JD.com’s billionaire founder, read “Fat Stock Grant Lifts Liu’s Billionaire Ranking.”)

JD.com is an online direct sales company, comparable to an Amazon.comAmazon.com, that also provides delivery services to shoppers. And like Amazon, it has only an arms-length relationship with profitability.

Even with $11.5 billion in fiscal 2013 revenue, the company posted a net loss of $8 million. That figure grows to $410 million when including the rising value of preferred shares it has issued, but on an adjusted basis (which strips out things like share-based compensation) the company eked out a $36 million profit and generated $376 million in free cash flow.

Sales growth is the story for investors though, and JD.com’s revenues jumped another 68% in 2013 after rocketing 96% higher in 2012.

“JD is riding the appetite for growth,” says Brendan Ahern, managing director at KraneShares, which runs a China Internet ETF, pointing out that the company is actually carrying a higher valuation than Amazon as it debuts on the public market, fetching more than two times sales at its initial market cap of $26 billion.

Ahern notes that this quarter’s earnings reports from 19 companies held within KWEB, the Kraneshares China Internet ETF, have shown weighted-average revenue growth of almost 50% and earnings growth of 40%. Compare that with the 41 names in the Dow Jones U.S. Internet index, which have posted revenue growth of 19% and earnings growth of 23%.

Investors are also targeting high-growth companies that can show earnings potential, or at least narrower losses “in the aftermath of the tech wreck,” Ahern says, referring to the sharp selloff in high-multiple growth-oriented technology stocks earlier this year.

JD.com sold 69 million of the 93.7 million ADS in the offering, raising $1.3 billion, with existing shareholders accounting for the remaining 24.7 million.

Those shareholders include CEO and founder Richard Qiangdong Liu, selling a tiny portion of his stake (13.9 million shares), but still in control of 83.7% of voting power at the company thanks to a dual share class structure that grants his 556 million Class B shares 20 votes each (to just 1 vote for Class A shares).

Update: The offering catapults Liu, who also goes by Liu Qiangdong, up the Forbes Billionaires List, with a stake now worth some $5.7 billion. When the list was published in March, Liu’s fortune was calculated at $2.7 billion.

Ahern also points out that JD.com is aligned with a “rich uncle” in the form of Tencent, which formed a strategic partnership with the company in March and also bought 138 million Class A shares in a private placement concurrent with Thursday’s IPO . JD reeled in another $1.3 billion in proceeds from the transaction.

JD.com’s $1.8 billion offering is the third-largest U.S. IPO of the year, according to data from Renaissance Capital, behind only Santander USA’s $1.8 billion and Ally Financial’s $2.4 billion deal. Among Internet stocks listed on U.S. exchanges, only Facebook in 2012 and TwitterTwitter last fall raised more than JD.com, though all those rankings could be lower after this summer should Alibaba deliver the record-breaking IPO many expect.

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